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Arvind Krishnamurthy - One of the best experts on this subject based on the ideXlab platform.
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International Liquidity Illusion: On the Risks of Sterilization
National Bureau of Economic Research, 2001Co-Authors: Ricardo J. Caballero, Arvind KrishnamurthyAbstract:During the booms that precede crises in emerging economies, policymakers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is a sterilization of capital inflows - essentially a swap of International reserves for public bonds. Despite its widespread use, sterilization is often criticized for its ineffectiveness and, in extreme cases, its potential backfiring. We argue that these concerns are justified when countries experience occasional external crises and domestic financial markets are illiquid. In this context, while standard Mundell-Fleming considerations may determine the impact of the sterilization on short term peso interest rates, a potentially more powerful and offsetting mechanism is triggered by the anticipated reversal of this policy in the event of an external crisis. If the instruments used in the sterilization are illiquid or result in fiscal deficits that reduce the Liquidity of the private sector, then the effective dollar cost of capital, which considers the whole path of expected future rates, may be lowered rather than raised by this policy. Most importantly, this dollar cost of capital reduction does not reflect a true increase in the country's International Liquidity during the external crisis and reversal, as would be the case with a successful sterilization, but just a decline in domestic private Liquidity. The impact of the latter on relative asset prices creates a sort of 'International Liquidity illusion' which fosters rather than depress aggregate demand, and exacerbates short term capital inflows.
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International Liquidity Management: Sterilization Policy in Illiquid Financial Markets
SSRN Electronic Journal, 2000Co-Authors: Ricardo J. Caballero, Arvind KrishnamurthyAbstract:During the booms that precede crises in emerging economies, policy makers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is sterilization - essentially a swap of International reserves for public bonds. However, there is an extensive debate on the effectiveness of this policy, with many arguing that it may be counterproductive once the (over-) reaction of the private sector is considered. But what forces account for the private sector's reaction remain largely unexplained. In this paper we provide a model to discuss these issues. We emphasize the International Liquidity management aspect of sterilization over the traditional monetary one, a re-focus that seems warranted when the main concern is external crisis prevention. We first demonstrate that policies to smooth expansion in anticipation of downturns can be Pareto improving in economies where domestic financial markets are underdeveloped. We then discuss the implementation and effectiveness of this policy via sterilization. The greatest risk of policy arises in situations where policy is most needed - that is , when financial markets are illiquid. Our mechanism is akin to the implicit bailout' problem, although the central bank acts non-selectively and only intervenes through open markets in our model. IlLiquidity replaces corruption and ineptitude. In addition to an appreciation of the currency and the emergence of a quasi-fiscal deficit, the private sector's reaction to sterilization may lead to an expansion rather than the desired contraction in aggregate demand or nontradeables investment and to a bias toward short term capital inflows. The main insights extend to International Liquidity management issues more generally.
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International Liquidity Management: Sterilization Policy in Illiquid Financial Markets
2000Co-Authors: Ricardo J. Caballero, Arvind KrishnamurthyAbstract:During the booms that invariably precede crises in emerging economies, policy makers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is sterilization --essentially a swap of International reserves for public bonds. However, there is an extensive debate on the effectiveness of this policy, with many arguing that it may be counterproductive once the (over-) reaction of the private sector is considered. But what forces account for the private sector's reaction remains largely unexplained. In this paper we provide a model to discuss these issues. We first demonstrate that policies to smooth expansions in anticipation of downturns can be Pareto improving in economies where domestic financial markets are underdeveloped. We then discuss the implementation of this policy via sterilization, outlining cases in which the policy succeeds and those in which it fails. Paradoxically the greatest risk of policy arises in situations where policy is most needed -- that is when financial markets are illiquid. Our mechanism is akin to the ``implicit bailout" problem, despite the fact that the central bank acts non-selectively and only intervenes through open markets; ilLiquidity replaces corruption and ineptitude. In addition to an appreciation of the currency and the emergence of a quasi-fiscal deficit, the private sector's reaction to sterilization may lead to an expansion rather than the wanted contraction in aggregate demand and a bias toward short term capital inflows.
William A. Allen - One of the best experts on this subject based on the ideXlab platform.
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International Liquidity Management Since the Financial Crisis
The World Economy, 2015Co-Authors: Richhild Moessner, William A. AllenAbstract:This article discusses how International Liquidity management has been affected by the recent crisis. It notes that since the Bretton Woods system collapsed in 1971 it was expected that the demand for International reserves would diminish, since countries were no longer obliged to sell foreign currencies in case of need to support their own currencies in foreign exchange markets. However, International reserves increased in total from 3.1% of world gross product at the end of 1970 to 16.7% at the end of 2013. The paper explains this phenomenon in the context of the global demand for Liquidity up to and after the global financial crisis of 2008-09. Different means of providing International Liquidity assurance are assessed and the paper concludes that without an International lender of last resort, the world financial structure remains vulnerable to a new Liquidity crisis.
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International Liquidity and the Financial Crisis
2012Co-Authors: William A. AllenAbstract:In the ongoing financial crisis, policy makers have for the most part appeared to be reactive, formulating emergency solutions as events unfold. However, in contrast to their performance during the Great Depression, central banks around the world, led by the Federal Reserve, acted decisively following the collapse of Lehman Brothers and provided huge injections of Liquidity into the financial markets, thereby preventing a far worse outcome. International Liquidity and the Financial Crisis compares the 2008 crisis with the disaster of 1931 and explores the similarities and differences. It considers the lasting effects of the crisis on International Liquidity, the possibilities for an International lender of last resort, and the enlargement of the International Monetary Fund after the crisis. It shows that there is no clear demarcation between monetary and macro-prudential policies, and discusses how central banks need to adapt to a new environment in which global Liquidity is much scarcer.
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the Liquidity consequences of the euro area sovereign debt crisis
The World Economy, 2012Co-Authors: William A. Allen, Richhild MoessnerAbstract:We examine the Liquidity effects of the euro area sovereign debt crisis, including its effects on euro area banks as a group, on intra-euro area financial flows, on the supply of and demand for collateral, and on International Liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending, its intermediation between national central banks in surplus and deficit countries and its collateral policy. The euro crisis has also created International Liquidity stresses. We find that central bank swap lines have only had limited effectiveness in alleviating the stresses, probably owing to some stigma being attached to their use.
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International Liquidity provision and currency-specific Liquidity shortages
Journal of financial transformation, 2012Co-Authors: Richhild Moessner, William A. AllenAbstract:In this paper we discuss the main innovation in central bank cooperation during the financial crisis of 2008-09, namely the emergency provision of International Liquidity through the establishment of bilateral central bank swap facilities, which have evolved to form interconnected swap networks. Based on the BIS International locational banking statistics, we present a measure of currency-specific Liquidity shortages for the US dollar, the euro, the yen, the pound sterling and the Swiss franc for a large number of advanced and emerging economies. We discuss the reasons for establishing swap facilities, relate our measure of currency-specific Liquidity shortages to the probability of a country receiving a swap line in that currency, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We find that countries with larger US dollar shortages on our measure, and economies that are large International financial centres, have a statistically significantly higher probability of receiving a US dollar swap line. We also find that actual US dollar funding obtained by drawing on the Fed’s swap lines at end-2008 was statistically significantly larger for economies with higher US dollar shortages on our measure, as well as for economies which are large International financial centres.
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The International Liquidity Crisis of 2008–2009
The World Economy, 2011Co-Authors: William A. Allen, Richhild MoessnerAbstract:The ‘credit crunch’ that began in August 2007 turned into a crisis when Lehman Brothers failed in September 2008. That event caused large International capital flows, including heavy repatriation of dollars to the United States. Central banks, led by the Federal Reserve, augmented the supply of International Liquidity through bilateral central bank swap facilities, and thereby prevented the crisis from becoming much worse. We discuss the reasons for establishing swap facilities, the risks that central banks run in extending swap lines and the limitations to their utility in relieving Liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the International Liquidity policies of governments and central banks.
Richhild Moessner - One of the best experts on this subject based on the ideXlab platform.
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International Liquidity Management Since the Financial Crisis
The World Economy, 2015Co-Authors: Richhild Moessner, William A. AllenAbstract:This article discusses how International Liquidity management has been affected by the recent crisis. It notes that since the Bretton Woods system collapsed in 1971 it was expected that the demand for International reserves would diminish, since countries were no longer obliged to sell foreign currencies in case of need to support their own currencies in foreign exchange markets. However, International reserves increased in total from 3.1% of world gross product at the end of 1970 to 16.7% at the end of 2013. The paper explains this phenomenon in the context of the global demand for Liquidity up to and after the global financial crisis of 2008-09. Different means of providing International Liquidity assurance are assessed and the paper concludes that without an International lender of last resort, the world financial structure remains vulnerable to a new Liquidity crisis.
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the Liquidity consequences of the euro area sovereign debt crisis
The World Economy, 2012Co-Authors: William A. Allen, Richhild MoessnerAbstract:We examine the Liquidity effects of the euro area sovereign debt crisis, including its effects on euro area banks as a group, on intra-euro area financial flows, on the supply of and demand for collateral, and on International Liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending, its intermediation between national central banks in surplus and deficit countries and its collateral policy. The euro crisis has also created International Liquidity stresses. We find that central bank swap lines have only had limited effectiveness in alleviating the stresses, probably owing to some stigma being attached to their use.
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International Liquidity provision and currency-specific Liquidity shortages
Journal of financial transformation, 2012Co-Authors: Richhild Moessner, William A. AllenAbstract:In this paper we discuss the main innovation in central bank cooperation during the financial crisis of 2008-09, namely the emergency provision of International Liquidity through the establishment of bilateral central bank swap facilities, which have evolved to form interconnected swap networks. Based on the BIS International locational banking statistics, we present a measure of currency-specific Liquidity shortages for the US dollar, the euro, the yen, the pound sterling and the Swiss franc for a large number of advanced and emerging economies. We discuss the reasons for establishing swap facilities, relate our measure of currency-specific Liquidity shortages to the probability of a country receiving a swap line in that currency, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We find that countries with larger US dollar shortages on our measure, and economies that are large International financial centres, have a statistically significantly higher probability of receiving a US dollar swap line. We also find that actual US dollar funding obtained by drawing on the Fed’s swap lines at end-2008 was statistically significantly larger for economies with higher US dollar shortages on our measure, as well as for economies which are large International financial centres.
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The International Liquidity Crisis of 2008–2009
The World Economy, 2011Co-Authors: William A. Allen, Richhild MoessnerAbstract:The ‘credit crunch’ that began in August 2007 turned into a crisis when Lehman Brothers failed in September 2008. That event caused large International capital flows, including heavy repatriation of dollars to the United States. Central banks, led by the Federal Reserve, augmented the supply of International Liquidity through bilateral central bank swap facilities, and thereby prevented the crisis from becoming much worse. We discuss the reasons for establishing swap facilities, the risks that central banks run in extending swap lines and the limitations to their utility in relieving Liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the International Liquidity policies of governments and central banks.
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the International Liquidity crisis of 2008â 2009
The World Economy, 2011Co-Authors: William A. Allen, Richhild MoessnerAbstract:The ‘credit crunch’ that began in August 2007 turned into a crisis when Lehman Brothers failed in September 2008. That event caused large International capital flows, including heavy repatriation of dollars to the United States. Central banks, led by the Federal Reserve, augmented the supply of International Liquidity through bilateral central bank swap facilities, and thereby prevented the crisis from becoming much worse. We discuss the reasons for establishing swap facilities, the risks that central banks run in extending swap lines and the limitations to their utility in relieving Liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the International Liquidity policies of governments and central banks.
Ricardo J. Caballero - One of the best experts on this subject based on the ideXlab platform.
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International Liquidity Illusion: On the Risks of Sterilization
National Bureau of Economic Research, 2001Co-Authors: Ricardo J. Caballero, Arvind KrishnamurthyAbstract:During the booms that precede crises in emerging economies, policymakers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is a sterilization of capital inflows - essentially a swap of International reserves for public bonds. Despite its widespread use, sterilization is often criticized for its ineffectiveness and, in extreme cases, its potential backfiring. We argue that these concerns are justified when countries experience occasional external crises and domestic financial markets are illiquid. In this context, while standard Mundell-Fleming considerations may determine the impact of the sterilization on short term peso interest rates, a potentially more powerful and offsetting mechanism is triggered by the anticipated reversal of this policy in the event of an external crisis. If the instruments used in the sterilization are illiquid or result in fiscal deficits that reduce the Liquidity of the private sector, then the effective dollar cost of capital, which considers the whole path of expected future rates, may be lowered rather than raised by this policy. Most importantly, this dollar cost of capital reduction does not reflect a true increase in the country's International Liquidity during the external crisis and reversal, as would be the case with a successful sterilization, but just a decline in domestic private Liquidity. The impact of the latter on relative asset prices creates a sort of 'International Liquidity illusion' which fosters rather than depress aggregate demand, and exacerbates short term capital inflows.
-
International Liquidity Management: Sterilization Policy in Illiquid Financial Markets
SSRN Electronic Journal, 2000Co-Authors: Ricardo J. Caballero, Arvind KrishnamurthyAbstract:During the booms that precede crises in emerging economies, policy makers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is sterilization - essentially a swap of International reserves for public bonds. However, there is an extensive debate on the effectiveness of this policy, with many arguing that it may be counterproductive once the (over-) reaction of the private sector is considered. But what forces account for the private sector's reaction remain largely unexplained. In this paper we provide a model to discuss these issues. We emphasize the International Liquidity management aspect of sterilization over the traditional monetary one, a re-focus that seems warranted when the main concern is external crisis prevention. We first demonstrate that policies to smooth expansion in anticipation of downturns can be Pareto improving in economies where domestic financial markets are underdeveloped. We then discuss the implementation and effectiveness of this policy via sterilization. The greatest risk of policy arises in situations where policy is most needed - that is , when financial markets are illiquid. Our mechanism is akin to the implicit bailout' problem, although the central bank acts non-selectively and only intervenes through open markets in our model. IlLiquidity replaces corruption and ineptitude. In addition to an appreciation of the currency and the emergence of a quasi-fiscal deficit, the private sector's reaction to sterilization may lead to an expansion rather than the desired contraction in aggregate demand or nontradeables investment and to a bias toward short term capital inflows. The main insights extend to International Liquidity management issues more generally.
-
International Liquidity Management: Sterilization Policy in Illiquid Financial Markets
2000Co-Authors: Ricardo J. Caballero, Arvind KrishnamurthyAbstract:During the booms that invariably precede crises in emerging economies, policy makers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is sterilization --essentially a swap of International reserves for public bonds. However, there is an extensive debate on the effectiveness of this policy, with many arguing that it may be counterproductive once the (over-) reaction of the private sector is considered. But what forces account for the private sector's reaction remains largely unexplained. In this paper we provide a model to discuss these issues. We first demonstrate that policies to smooth expansions in anticipation of downturns can be Pareto improving in economies where domestic financial markets are underdeveloped. We then discuss the implementation of this policy via sterilization, outlining cases in which the policy succeeds and those in which it fails. Paradoxically the greatest risk of policy arises in situations where policy is most needed -- that is when financial markets are illiquid. Our mechanism is akin to the ``implicit bailout" problem, despite the fact that the central bank acts non-selectively and only intervenes through open markets; ilLiquidity replaces corruption and ineptitude. In addition to an appreciation of the currency and the emergence of a quasi-fiscal deficit, the private sector's reaction to sterilization may lead to an expansion rather than the wanted contraction in aggregate demand and a bias toward short term capital inflows.
Marco Flávio Da Cunha Resende - One of the best experts on this subject based on the ideXlab platform.
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Growth cycles in Latin America and developed countries
2008Co-Authors: Adriana Moreira Amado, Marco Flávio Da Cunha Resende, Frederico G. JaymeAbstract:The Minskyan approach to financial instability and its effects on the real economy have recently been revived in order to explain the exchange rate crises undergone by the so-called emergent economies. Economies of this type are characterized by repeated scarcity of foreign currency, which can be explained by using Neo-Schumpeterian theory. Based on the Minskyan approach and on the Neo-Schumpeterian literature, this study seeks to demonstrate that there is a cyclic recurrence of exchange rate crises in Latin-American (peripheral) economies. By using data on International Liquidity, the balance of payments and the increase in production in the G7 economies and in thirteen Latin-American economies, it was found that the Latin-American economies mirror the cycles of International Liquidity.
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Liquidez internacional e ciclo reflexo: algumas observações para a América Latina
Revista de Economia Política, 2007Co-Authors: Marco Flávio Da Cunha Resende, Adriana Moreira AmadoAbstract:International Liquidity and reflex cycle: some observations to Latin America. The International financial instability of the 1990 has been analysed in several occasions on Minskyan perspectives. The paper is based on this theoretical approach and intends to demonstrate that the financial fragility hypothesis is very useful to the analysis of the cycle in peripheral economies, which real performance is associated to the availability of International Liquidity. The analysis is based on three Latin American countries: Brazil, Argentina and Mexico.
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Growth Cycles In Latin America And Developed Countries
2007Co-Authors: Adriana Moreira Amado, Marco Flávio Da Cunha Resende, Frederico G. JaymeAbstract:The Minskyan approach to financial instability and its effects on the real economy have recently been revived in order to explain the exchange rate crises undergone by the so-called emergent economies. Economies of this type are characterized by repeated scarcity of foreign currency, which can be explained by using Neo-Schumpeterian theory. Based on the Minskyan approach and on the Neo-Schumpeterian literature, this study seeks to demonstrate that there is a cyclic recurrence of exchange rate crises in Latin-American (peripheral) economies. By using data on International Liquidity, the balance of payments and the increase in production in the G7 economies and in thirteen Latin-American economies, it was found that the Latin-American economies mirror the cycles of International Liquidity. (This abstract was borrowed from another version of this item.)
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ECONOMIC GROWTH CYCLES IN LATIN AMERICA AND DEVELOPING COUNTRIES
2006Co-Authors: Adriana Moreira Amado, Marco Flávio Da Cunha Resende, Frederico G. JaymeAbstract:The Minskyan approach to financial instability and its effects on the real economy have recently been revived in order to explain the exchange rate crises undergone by the so-called emergent economies. Economies of this type are characterized by repeated scarcity of foreign currency, which can be explained by using Neo-Schumpeterian theory. Based on the Minskyan approach and on the Neo-Schumpeterian literature, this study seeks to demonstrate that there is a cyclic recurrence of exchange rate crises in Latin-American (peripheral) economies. By using data on International Liquidity, the balance of payments and the increase in production in the G7 economies and in thirteen Latin-American economies, it was found that the Latin-American economies reflect the cycles of International Liquidity.
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Liquidez internacional e exportações brasileiras: 1960-2002
2005Co-Authors: Marco Flávio Da Cunha Resende, Nara GodoyAbstract:By using the Post-Keynesian approach, a link was obtained for International Liquidity cycles and undevelopment economies exports. We argue that the International Liquidity variable should be included in the export equation for Brazil, which was estimated in this paper. The econometric procedures were based on the Engle Granger and Johansen methods. The results don’t reject the hypothesis that there is a long-term relationship between the International Liquidity and the Brazilian exports.